Hello,

I hope you can help as neither of my accountants in the UK and USA can answer this (as they don't know the tax laws of the other country).

Background: I am a US permanent resident, but are working in the UK for 10 months during the current US tax year, so will have to pay tax in the US as well. My husband and I have a limited company in the UK. My income in the UK is pretty high, so I am expecting to pay ++tax in the US as well.

My husband is busy with a Ph.D and has out of pocket study costs of $15,000.00 for 2009. My accountant in the USA told me that the study costs can be deducted from the tax payable in the US and not just as an expense prior to tax calculations, which will be the case in the UK (deducted as a company expense).

My two questions are: 1) Where should I submit this study expense? The pound is so strong at the moment that even if I deduct it in the UK prior to tax, will it not work better than deducting it in the US? On the other hand, deducting something from tax due seems to be better?
2) I have two children which go to part time day care. I can't use child credits in the UK as I am on an HSMP visa, but I know that child care can be deducted in the US. Should I submit my child care as an expense on this side (UK) or have it deducted in the US (similar reasoning to the question above)?

I appreciate your time answering this question.

Thank you,
Marelise

You can not deduct study cost or get any credit for the cost on the U.S. tax return.

If you can treat it as a business expense on your foreign limited company, that is what you should do.

You should be aware of a few other filing requirements -- Form TD F 90-22.1 and Form 5471. Form 5471 is attached to your U.S. tax return.

Dear MukatA,
The US stays my primary tax country (as I am only working outside of the country for 10 months). I have been able to deduct for child credit and university courses in the past (on my US tax return). Why do you recon won't I be able to deduct now? I don't deduct at both places. I'll plan to deduct at either the US side or the UK side.

Thanks,
Marelise

Marelise:

There are two child-related credits to consider: the Child Tax Credit and the Child Care Credit.

If the children were in the U.S. for at least part of 2009 and have SSNs, you can claim the Child Tax Credit for each child (provided your income is not too high to phase out this credit).

The Child Care Credit IS permitted for child care in the U.K. but you will have to attach an explanatory statement to the Form 2441 to show who provided the child care and why they do not have a U.S. tax identification number.

As for your husband's PhD costs, you have two options:

1) You can claim that as either a Lifetime Learning Credit or as a adjustment to income deduction, provided (again) that your income is NOT too high to phase out this credit/deduction. Then, once you have claimed this deduction/credit, you can then claim the remaining costs as an employee business expense itemized deduction on Schedule A, provided your income is not too high that the Alternative Minimum Tax does not negate this deduction.

2) You can claim it as a training cost under your UK company IF you file a U.S. tax return for the UK company and IF the PhD costs qualify as a valid training cost.

All of the above are just possible courses of action. There are so many variables associated with these scenarios that it is impossible to give you a proper answer without modeling the scenarios under both the U.K. and the U.S. tax returns. Since I do not have expertise on the U.K. tax system, I cannot properly model the U.K. tax issues.

What you really need to do is to find a tax advisor who has the needed expertise in BOTH the U.S. and U.K. tax systems and allow him/her to model your situation under both systems to find proper mix to pay the least amount of taxes. I expect such modeling would result in a significant consulting fee, but, if your tax bracket is high enough (as it seems to be indicated by your original post), it will be money well spent.

Thank you for your time in responding to my question!

Glad to help!

It is unlikely that you will pay US tax on your UK income; generally, UK tax rates are higher than US rates.

It is irrelevant how much time you spent in the UK since you will not be employing the Foreign Earned Income Exclusion; you will use the Foreign Tax Credit (Form 1116) and deduct the UK tax from your US tax up to the limitation amount.

Further, it is not a question of choosing either UK or US to take deductions and credits. You may fully deduct on BOTH that which the law allows under each tax system.

If your children are US citizens it does not matter where they are. As you know, your child tax credit begins to dwindle after you reach $110,000 in income.

To begin to get an idea of what the US/UK conversion rate will be for 2009 go to:
FXHistory - Historical Currency Exchange Rates (http://www.oanda.com/convert/fxhistory)
And plug in the dates and currency.

As MukatA says, you should look at Form 5471 if you have a limited company in the U.K. The penalty for failing to file this form in the U.S. is $10,000 per year. The FBAR has similar or greater penalties.

If you are running expenses through the U.K. company, they may be deductible from the company's income but not from your income for U.S. tax purposes.